An Analysis of Mutual Fund Performance of SBI & Investors Confidence on Fund Managers of SBI

Abhishek Singha 0810PGDM002

POST GRADUATE DIPLOMA IN MANAGEMENT

Institute of Public Enterprise O.U Campus, Hyderabad 500 007

1. Mutual Fund Industry in India

1.1 History of Mutual Funds in India The mutual fund industry in India has been in existence since 1964 when the Government of India established the United Trust of India (UTI) under a special Act of Parliament. For almost twenty years, the various schemes offered by the UTI were the only options available to the investors to invest in mutual funds. The monolithic structure of the mutual funds in India was, however broken when Government of India permitted the public sector banks and public sector insurance corporations such as Life Insurance Corporation of India and general Insurance Corporation of India to launch their own funds. Later in 1993, during the period of the emergence of liberalization and globalization, the Government also permitted private sector to enter the mutual fund business.

1.2 Elements of Mutual Fund A mutual fund is set up by a sponsor. However, the sponsor cannot run the fund directly. He has to set up two arms: a trust and Asset Management Company. The trust is expected to assure fair business practice, while the AMC manages the money. All mutual funds functions under Sebi (Mutual Fund) regulations 1996 except UTI.

The mutual fund collects money directly or through brokers from investors. The money is invested in various instruments depending on the objective of the scheme. The income generated by selling securities or capital appreciation of these securities is passed on to the investors in proportion to their investment in the scheme. The investments are divided

into units and the value of the units will be reflected in Net Asset Value or NAV of the unit. NAV is the market value of the assets of the scheme minus its liabilities. NAV is the net asset value of the scheme divided by the number of units outstanding on the valuation date. Mutual fund companies provide daily net asset value of their schemes to their investors. NAV is important, as it will determine the price at which you buy or redeem the units of a scheme depending on the load structure of the scheme. Classification of mutual funds in India1. Open-ended funds: Investors can buy and sell units of open-ended funds at NAVrelated price every day. Open-end funds do not have a fixed maturity and it is available for subscription every day of the year. Open-end funds also offer liquidity to investments, as one can sell units whenever there is a need for money. 2. Close-ended funds: These funds have a stipulated maturity period, which may vary from three to 15 years. They are open for subscription only during a specified period. Investors have the option of investing in the scheme during initial public offer period or buy or sell units of the scheme on the stock exchanges. Some close-ended funds repurchase the units at NAV-related prices periodically to provide an exit route to the investors. Mutual Funds are divided into two types which are as under: 1. Equity Funds: These are the types of funds where the capital of investor is invested in the stock market. Equity funds are termed as high risk high return funds. Equity funds can be open ended as well as closed ended. Equity funds also have a marginal exposure to debt assets depending on the investment objective of the fund manager. Safety of capital is not assured in equity funds.

2. Debt Funds: These are funds where the safety of capital is assured. The capital of an investor will be invested in the government bonds, securities and current assets. A debt fund gives an assured return to its investor. Its a low risk low return fund. Debt funds can be open ended as well as closed ended. Debt funds can have a marginal exposure in equity. There are two options in equity and debt funds which are as follows: A. Dividend: An investor will be awarded dividends whenever the fund declares it. Broadly its the income generated by the mutual fund scheme on its investment is distributed to the investor. Dividend is not assured by an Asset Management Company and it is linked closely to the stock/debt market. The investor can choose either to encash or re invest it in the same mutual fund scheme. B. Growth: In growth option the investor does not receive an income. The growth option reflects the growth in investments registered by the mutual fund scheme. The investor can either redeem the entire money or can do partial withdrawal. There are different types of mutual fund schemes in both equity and debt which are as follows: 1. Interval Funds: These funds combine the features of both open and close-ended funds. They are open for sale and repurchase at a predetermined period. 2. Growth funds: They normally invest most of their corpus in equities, as their objective is to provide capital appreciation over the medium-to-long term. Growth schemes are ideal for investors with risk appetite. 3. Income funds: As the name suggests, the aim of these funds is to provide regular and steady income to investors. They generally invest their corpus in fixed income securities

like bonds, corporate debentures, and government securities. Income funds are ideal for those looking for capital stability and regular income. 4. Balanced funds: The objective of balanced funds is to provide growth along with regular income. They invest their corpus in both equities and fixed income securities as indicated in the offer documents. Balanced funds are ideal for those looking for income and moderate growth. 5. Money market funds: These funds strive to provide easy liquidity, preservation of capital and modest income. MMFs generally invest the corpus in safer short-term instruments like treasury bills, certificates of deposit, commercial paper and inter-bank call money. Returns on these schemes hinges on the interest rates prevailing in the market. MMFs are ideal for corporate and individual investors looking to park funds for short period. 6. Tax saving schemes: Tax saving schemes or equity-linked savings schemes offer tax rebates to investors under section 88 of the Income Tax Act. They generally have a lockin period of three years. They are ideal for investors looking to exploit tax rebates as well as growth in investments. 7. Special schemes: These schemes invest only in the industries specified in the offer document. Examples are InfoTech funds, FMCG funds, pharma funds, etc. These schemes are meant for aggressive and well-informed investors. 8. Index funds: Index Funds invest their corpus on the specified index such as BSE Sensex, NSE index, etc. as mentioned in the offer document. They try to mimic the composition of the index in their portfolio. Not only are the shares, even their weight age replicated. Index funds are a passive investment strategy and the fund manager has a

limited role to play here. The NAVs of these funds move along with the index they are trying to mimic save for a few points here and there. This difference is called tracking error. 9. Sector specific schemes: These funds invest only specified sectors like an industry or a group of industries or various segments like A' Group shares or initial public offerings. Features of mutual funds in India:Affordability: Mutual funds allow you to start with small investments. For example, if you want to buy a portfolio of blue chips of modest size, you should at least have a few lacs of rupees. A mutual fund gives you the same portfolio for meager investment of Rs 1,000-5,000. A mutual fund can do that because it collects money from many people and it has a large corpus. Professional management: The major advantage of investing in a mutual fund is that you get a professional money manager for a small fee. You can leave the investment decisions to him and only have to monitor the performance of the fund at regular intervals. Diversification: Considered the essential tool in risk management, mutual funds makes it possible for even small investors to diversify their portfolio. A mutual fund can effectively diversify its portfolio because of the large corpus. However, a small investor cannot have a well-diversified portfolio because it calls for large investment. For example, a modest portfolio of 10 blue-chip stocks calls for a few a few thousands. Convenience: Mutual funds offer tailor-made solutions like systematic investment plans and systematic withdrawal plans to investors, which is very convenient to investors. Investors also do not have to worry about the investment decisions or they do not have to

deal with their brokerage or depository, etc. for buying or selling of securities. Mutual funds also offer specialized schemes like retirement plan, children's plan, industry specific schemes, etc. to suit personal preference of investors. These schemes also help small investors with asset allocation of their corpus. It also saves a lot of paper work. Cost effectiveness: A small investor will find that a mutual fund route is a cost effective method. AMC fee is normally 2.5% and they also save a lot of transaction costs as they get concession from brokerages. Also, they get the service of a financial professional for a very small fee. If they were to seek a financial advisor's help directly, they may end up pay more. Also, the size of the corpus should be large to get the service of investment experts, who offer portfolio management. Liquidity: You can liquidate your investments anytime you want. Most mutual funds dispatch checks for redemption proceeds within two or three working days. You also do not have to pay any penal interest in most cases. However, some schemes charge an exit load. Tax breaks: You do not have to pay any taxes on dividends issued by mutual funds. You also have the advantage of capital gains taxation. Tax-saving schemes and pension schemes give you the added advantage of benefits under Section 88. Investments up to Rs 10,000 in them qualify for tax rebate. Transparency: Mutual funds offer daily NAVs of schemes, which help you to monitor your investments on a regular basis. They also send quarterly newsletters, which give details of the portfolio, performance of schemes against various benchmarks, etc. They are also well regulated and Sebi monitors their actions closely.

The mutual fund pool money from investors and invest in shares and income earn from the shares distributed between the account holders according to their share of holdings. Indian mutual fund industry is sound and effective in case of investor's point of view.

In the recent years Indian mutual fund industry is witnessing a rapid growth as a result of infrastructure development, increase in personal financial assets, and rise in foreign participation. With the growing risk appetite, rising income and increasing awareness mutual funds in India are becoming a preferred investment option compared to other investment options such as fixed deposits and postal savings which are considered safe but give comparatively low return destinations.

2. SBI MUTUAL FUND

SBI Mutual Fund, Indias largest bank sponsored mutual fund, is a joint venture between State Bank of India and Sociate Generale Asset Management, one of the worlds top notch fund management companies. Over the years, SBI Mutual Fund has curved a niche for itself through prudent investment decisions and consistent wealth creation.

SBI Mutual Fund (SBI MF) is one of the largest mutual funds in the country with an investor base of over 5.4 million. With over 20 years of rich experience and expertise in the area of fund management, SBI MF has been delivering value to its customers over the years. SBI MF has an outstanding record of judicious investments and consistent wealth creation. In its twenty years of operation SBI MF has launched 38 schemes and redeemed 15 of them successfully. Schemes of SBI MF have successfully outperformed the

benchmark indices and emerged as a preferred investment option for millions of customer and High Net worth Individuals (HNI).

SBI mutual fund has been the proud recipient of the ICRA online awards- 8 times, CNBC TV 18- Crisil award 2006 and most recently with CNBC TV 18 Mutual Fund of the year 2007. Since the market has been becoming complex over the years there are requirements for clear understanding of innumerable parameters regarding the market movements and performance of mutual funds. At SBI MF, considerable resources are invested to gain, maintain and sustain profitable insights into market movements. At SBI MF it is made sure that the investors get maximum benefits year after year. The expert team at SBI MF consisting of experienced and market savvy researchers prepare comprehensive analytical and informative report on diverse sectors and identify stocks that promise high performance in the future.

The team works in tandem with a compliance and risk monitoring department, which ensures minimization of operational risk while protecting the interest of the investors. Much of the credit for sustained performance of SBI Mutual Fund goes to the fund management team. They are the real performers whose expertise, skills and capabilities reward the investors. The risk management team also contributes enormously in protecting the interest of the investors, headed by the chief risk officer (CRO). The CRO is responsible for managing risk within the organization including investments, marketing, operations etc. Since its inception, SBI MF has provided the investors with maximum benefits on their investments and excellent customer service.

3. LITRETURE REVIEW
Literature Review has a major impact on any research. The reviews of the mutual funds which had significant impact while doing this research is mentioned below:

Europroperty 2004/2005 published an article on the Germanys biggest open ended Fund Managers trying to restore investors confidence by providing lot of transparency of the funds they were managing. The four companies were CGI, Degi, Deka Immobilien Investment and Difa have agreed to provide lot of transparency to the investors by providing them adequate information about their portfolio including the rent and the yields. They started giving clear description of the monthly inflows and outflows of the funds to the customers. According to the Funds Association BVI, the Fund managers who were pledging to become more transparent covered 82% of their total fund values.

A study done by Duffy, Maureen Nevin, Dec 2004, Vol 198 issue 6 from When Investors trust is shaken explains the techniques that several Investment Advisors applied while dealing with client concerns over the Mutual Fund trading scandals. The study highlights the amount of dent in public confidence because of the unethical practices applied by the US financial institutions. This study points out that Mutual Funds have always been touted as an investment vehicle that allowed the average investor to benefit from cost effective professional management. Then many firms took steps to be well versed with the investigation and to be ready to answer any client query to restore their confidence.

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Manager- Investor conflicts in Mutual Funds a research done by Mahoney, Paul.G, Journal of Economic Perspectives, spring 2004, Vol. 18, issue 2 highlights the fact that the Fund Managers stock selection efforts generate excess returns that justifies the associated fees and the transaction costs. Their report suggests that Mutual Fund can be considered as a Black Box wherein the investor is oblivious of the strategy incorporated by the Fund Managers. This gives rise to the conflicts among the Investors and the Fund Managers. This article points out the structure and regulation of the Mutual Funds and the incentives which are associated with them who make decisions for the funds. The article also fosters the cash flow structure from the Mutual Fund investors to the Fund Managers through the Third party agencies. It even pointed out the punishments awarded to the Fund managers and brokers who used improper trading practices.

Mutual Fund flows and Investors returns- an empirical examination of fund investor timing by Friesen, Geoffrey.C, Sapp, Travis R.A. Journal of Banking and Finance, Sep 2007, Vol 31, Issue 9 examines the cash flow ability of the Mutual Fund investors using cash flow data at the individual fund level. It was measured that Underperformance due to poor timing was more in the load funds and in the large risk adjusted returns. It was also measured that Investors in both actively managed fund and Index funds exhibit poor investment timings. In their study they have come out with a consistent empirical study on investor return chasing behavior.

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Reputational Repair by Risk, March 2004, Vol. 4, Issue 3, states how the Investors confidence was badly hit after the WorldCom and Enron debacle. The situation was repairing but then suddenly couple of bad news again hit the Mutual Fund Industry and in turn the Investors Confidence got affected. A series of revelations related to market timings has made the investors to exploit the arbitrage opportunities and late trading cost. Reputational risks are very difficult to quantify according to the article. Reputational risks directly affect the Investors Confidence as it hampers the long term relationship.

Investor Profiling and Investment Planning by Purkayastha, Saptarshi, ICFAI Journal of Management Research, Dec 2008, Vol. 7, Issue 12 highlights that Risk tolerance, a Persons attitude towards accepting risk is an important concept for both financial service providers and the consumers. They pointed out that a persons age, occupation, designation and income determines a persons risk taking ability. They collected data from International clients. This study analyzes the data in two ways. First stage they analyzed whether the demographics of a client do affect his investment or not. In the second stage people having certain demographics and risk appetite only invest money in reality. However they came to the conclusion that people invest their major chunk of money in the average risk Mutual Funds irrespective of their demographics and risk appetite.

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3 Funds that every investor should own by Forbes, Sep 2003, Vol. 172, Issue 5 did a thorough study of the Mutual Funds and came out that only 8300 portfolios are truly stellar combining good performance and parsimonious fees. The study came out with 3 funds which did fulfill their expectation remarkably. Those 3 funds may return a bit more or cost a bit less. They have rated the funds with grades. A grade for the best performance and C grade for the worst performance. They also considered the Fund Managers savvy and stamina while plucking out the right stocks at right time.

Success in complex decision contexts- The impact of the Consumer knowledge, involvement and risk willingness on Return on Investments in Mutual Funds and Stocks by Martenson, Rita, International Review of Retail, Distribution and Consumer

Research, Oct 2005, Vol 15, Issue 4, their study showed that Consumer knowledge involvement and risk are the key concept in Consumer Behavior Research. The study reveals the relationship between these 3 concepts and the Return on investment in Mutual Funds. The study analyzed that the knowledge concept should be modeled in terms of three dimensions i.e. ability, opportunity and familiarity. It was stated by them that Consumers ability and opportunity to access stock market has a significant impact on the returns which in turn familiarity and risk willingness. Their study also showed that risk willingness has a stronger effect on returns than the familiarity.

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4. Research Objective
1. To determine the Net Asset Value (NAV) returns pattern of SBI Mutual Funds during boom and recession. 2. To determine the Assets under Management (AUM) patterns of SBI Mutual Funds during boom and recession. 3. To study the portfolio change patterns of SBI Mutual Funds during boom and recession. 4. To determine the investors confidence on Fund Manager during boom and recession.

5. Methodology
There are two traditional measurement techniques that are used to identify and measure the relationship between the dependent variable and the independent variables. In this case Investors confidence on Fund Manager is considered as dependent variables. Market Information, Market conditions, attitude of the investor, return on investment and reference group are the predictor or independent variables.

There are two types of data analysis has been done for this research. Firstly a secondary data analysis has been done and then a primary data analysis has been done. The source of secondary data is the monthly fact sheets of SBI mutual funds. It gave clear details of the NAV and AUM of the funds on monthly basis. The time period for the secondary data has been considered from April 07 to March 09. The time period has been divided into two parts i.e. April 07 to Jan 08 has been termed as the boom period and from Feb 08 to

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March 09 has been termed as recession period. A t test has been performed over NAV returns of both equity and debt funds of two periods and simultaneously the interpretation has been done. Similarly T- test has been performed over the AUM inflows and outflows of both equity and debt funds of the two periods and simultaneously interpretation has been done.

The second part of the research comprises of the primary data and its analysis. The primary data has been collected from a sample size of 40. The sample has a mixture of respondents as it includes HNIs, Government employees, Middle level managers and Market Analysts. The sample was segregated to get a more precise analysis. After the data collection regression is done on the primary data to understand the impact of the independent variables on the dependent variables. Lastly an investor behavior cycle is determined.

6. HYPOTHESES

To investigate the average return of mutual funds we need to analyze the effect of the independent variables on the dependent variables. We will introduce the null hypothesis and alternate hypothesis and analyze the performance of the SBI mutual funds based on that.

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7. Secondary Data Analysis

7.1 Comparative analysis on the NAV returns of the Equity & Debt Funds 1. To do a comparative analysis on the NAV returns of the Mutual Funds (Equity) of SBI during a boom period (April 07 Jan 08) and a recession period (Feb 08- March 09). Null Hypothesis: There is no significant difference between the performance of the following funds during the period April 07 Jan 08 and Feb 08- March 09 He01- SBI Multicap Fund He02- SBI Equity Fund He03- SBI Index Fund He04- SBI Multiplier plus Fund He05- SBI Bluechip Fund He06- SBI Tax gain Fund He07- SBI Contra Fund He08- SBI Emerging Opportunities He09- SBI FMCG Fund He010- SBI IT Fund He011- SBI Pharma Fund He012- SBI Comma Fund He013- SBI Global Fund He014- SBI Mid Cap Fund He015- SBI Arbitrage Fund He016- SBI Balanced Fund

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Alternate Hypothesis: There is a significant difference between the performance of the following funds during the period April 07 Jan 08 and Feb 08- March 09. Hea1- SBI Multicap Fund Hea2- SBI Equity Fund Hea3- SBI Index Fund Hea4- SBI Multiplier Plus Fund Hea5- SBI Bluechip Fund Hea6- SBI Tax Gain Fund Hea7- SBI Contra Fund Hea8- SBI Emerging Opportunities Hea9- SBI FMCG Fund Hea10- SBI IT Fund Hea11- SBI Pharma Fund Hea12- SBI Comma Fund Hea13- SBI Global Fund Hea14- SBI Mid Cap Fund Hea15- SBI Arbitrage Fund Hea16- SBI Balanced Fund

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Table 1: t -test of NAV returns of the Equity Funds.

H.no.

Fund Name

Reference Reference t value period 1 Period 2

Significance Value .005

Supporting hypotheses Hea1

1.

Multicap

April 07 Feb 08 3.777 Jan 08 March 09

2. 3. 4.

Equity Index Multiplier Plus

April 07 Feb 08 3.856 Jan 08 March 09 April 07 Feb 08 3.074 Jan 08 March 09 April 07 Feb 08 4.178 Jan 08 March 09

.005 .015 .003

Hea2 Hea3 Hea4

5. 6. 7. 8. 9. 10. 11. 12.

Bluechip Tax Gain Contra Emerging FMCG IT Pharma Comma

April 07 Feb 08 3.460 Jan 08 March 09 April 07 Feb 08 3.531 Jan 08 March 09 April 07 Feb 08 3.364 Jan 08 March 09 April 07 Feb 08 3.766 Jan 08 March 09 April 07 Feb 08 1.995 Jan 08 March 09 April 07 Feb 08 1.130 Jan 08 March 09 April 07 Feb 08 1.379 Jan 08 March 09 April 07 Feb 08 0.515 Jan 08 March 09 18

.009 .008 .010 .005 0.081 .291 .205 .619

Hea5 Hea6 Hea7 Hea8 He09 He10 He11 He12

13. 14. 15. 16.

Global Midcap Arbitrage Balanced

April 07 Feb 08 3.301 Jan 08 March 09 April 07 Feb 08 4.171 Jan 08 March 09 April 07 Feb 08 -.361 Jan 08 March 09 April 07 Feb 08 3.536 Jan 08 March 09

.011 .003 .727 .008

Hea13 Hea14 He15 Hea16

Interpretation Multicap, Equity, Index, Multiplier Plus, Bluechip, Tax gain, Contra, Emerging, Global, Midcap, and Balanced funds has the significance level less than or equal to 0.05 which means the alternate hypothesis has been accepted and the null hypothesis is rejected for these funds. The reason for the acceptance could be the during the boom period (April 07 Jan 08) these funds gave excellent returns because the stocks these funds were holding witnessed sharp rise in their prices and Sensex rose from 12000 points to 21000 points during that period. One important point over here is the Fund Managers increased the large cap allocation more during the boom period because market was witnessing a sharp rally which was very unpredictable. So the Fund managers increased their assets in large cap because the large cap stocks had good fundamentals and their EPS and PE were also good.

But during the recession period (Feb 08 March 09) the Fund Managers of these funds reduced their large cap allocation and simultaneously increased the mid cap allocation

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because they would have thought when market came down to 16000 points from 21000 points that would make midcaps more profitable if the market rises again. But the markets continued to fell because of the global woes and sharp rise in the prices of crude oil. Those funds were hit very badly because midcap stocks were hammered and Fund Managers made the mistake of increasing midcap allocation. During the period from October 2008 the Fund Managers started reducing their mid cap allocation and subsequently increased their Current assets allocation. This particular move made the funds to revive and the funds started giving marginal profits during Feb 09 and March 09.

The funds which shows the significance level of less than or equal to 0.05 are all equity diversified funds. Their portfolio was diversified into all the sectors. The major sectors were energy, financial services and manufacturing sector. Financial services sector was badly hit because of the sub prime crisis. Even the energy and manufacturing sector were also struggling due to the recession. Every stock was hammered during this period with leaving the fund managers clueless. Multicap, Index, Multiplier plus, Bluechip, Contra, Global and Balanced fund has an exposure to derivative market for hedging purposes. The derivative exposure also had turned out to be a weaker move because derivative market also had a blood bath. This could be one of the reason for these funds to have a significance level less than or equal to 0.05.

Last but not the least the FIIs play a major role in the Indian stock market and as well in the mutual fund investments. During the boom period they invested heavily in the equity

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based mutual funds and during the recession period they pulled out a major chunk from the mutual funds which resulted in sharp fall for all the funds. This pulls out made the NAVs of the funds to drop down sharply.

FMCG, IT, Pharma, Arbitrage and Comma funds had significance level of more than 0.05 which means the null hypothesis is accepted and alternate hypothesis is rejected. These funds were not affected by the recession and the reason could be that they had no exposure to derivatives. Moreover FMCG and Pharma are the two most conservative sectors which didnt get hit so badly during the recession period because they cater to the daily needs of the peoples. Customers had a regular demand for these sectors.

2. To do a comparative analysis on the NAV returns of the Mutual Funds (Equity) of SBI during a boom period (April 07 Jan 08) and a recession period (Feb 08- March 09).

Null Hypothesis: There is no significant difference between the performance of the following funds during the period April 07 Jan 08 and Feb 08- March 09. Hd01- SBI Monthly Income Plan Hd02- SBI Premiere Liquid Fund Hd03- SBI Childrens Benefit Plan Hd04- SBI Income plus Savings Hd05- SBI Income Fund

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Hd06- SBI Gilt Fund Hd07- SBI Floater Plan Hd08- SBI Floating Rate short term Hd09- Floating rate long term Hd010- SBI NRI Investment plan Hd011- SBI Income Plus Hd012- SBI Insta Cash Hd013- SBI Insta Cash Liquid Hd014- SBI Short Horizon (Liquid) Hd015- SBI Short Horizon (Income)

Alternate Hypothesis: There is a significant difference between the performance of the following funds during the period April 07 Jan 08 and Feb 08- March 09.

Hda1- SBI Monthly Income Plan Hda2- SBI Premiere Liquid Fund Hda3- SBI Childrens Benefit Plan Hda4- SBI Income plus Savings Hda5- SBI Income Fund Hda6- SBI Gilt Fund Hda7- SBI Floater Plan Hda8- SBI Floating Rate short term

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Hda9- Floating rate long term Hda10- SBI NRI Investment plan Hda11- SBI Income Plus Hda12- SBI Insta Cash Hda13- SBI Insta Cash Liquid Hda14- SBI Short Horizon (Liquid) Hda15- SBI Short Horizon (Income)

Table 2: t test of NAV returns of the Debt Funds

H.no.

Fund Name

Referen ce

Referenc e Period

t value

Signifi Supporting cance Level .019 .142 .200 .047 .043 .407 .478 Hypothesis Hda1 Hd02 Hd03 Hda4 Hda5 Hd06 Hd07

1. 2. 3. 4. 5. 6. 7.

Monthly Income Plus Premiere Liquid Childrens

Period 1 2 April 07 Feb 08 2.942 Jan 08 March 09 April 07 Feb 08 -1.630 Jan 08 March 09 April 07 Feb 08 -1.384

Benefit Jan 08 March 09 Income Plus April 07 Feb 08 2.348 Savings Income Gilt Floater Jan 08 March 09 April 07 Feb 08 2.398 Jan 08 March 09 April 07 Feb 08 .876 Jan 08 March 09 April 07 Feb 08 .744 Jan 08 March 09

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8. 9. 10.

Floating Rate April 07 Feb 08 -.094 Short Term Jan 08 March 09 Floating Rate April 07 Feb 08 1.702 Long term NRI Investment Jan 08 March 09 April 07 Feb 08 2.357 Jan 08 March 09

.928 .127 .046

Hd08 Hd09 Hda10

11. 12. 13.

Long term Income Plus Insta Cash Insta Liquid

April 07 Feb 08 2.310 Jan 08 March 09 April 07 Feb 08 -2.294

.05 .051 .203

Hda11 Hda12 Hd13

Jan 08 March 09 Cash April 07 Feb 08 -1.386 Jan 08 March 09

14.

Floater Short Horizon

April 07 Feb 08 -.849 Jan 08 March 09

.552

Hd14

15.

Liquid Short Horizon Income

April 07 Feb 08 -.282 Jan 08 March 09

.825

Hd15

Interpretation Monthly Income Plus, Income plus, Income fund, NRI Investment fund, Income plus Savings and Insta cash scheme income are the funds which had the significance level of less than or equal to 0.05. The alternate hypothesis is accepted and the null hypothesis is rejected. Majority of these funds had a marginal equity exposure which could have been a reason for the acceptance of alternate hypothesis. Moreover the funds which relied on

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commercial papers and non convertible debentures had taken a hit. During the period from April 07 to Sep 08 these funds relied on Commercial papers and Non convertible debentures and after that the Fund Managers started reducing the commercial paper and non convertible debentures allocation.

The Premiere Liquid, Gilt, Floater, Childrens benefit, Floating rate long term and short term, Insta Cash liquid scheme , short horizon savings and short horizon liquid scheme had significance level of more than 0.05 which means Null hypothesis is accepted and Alternate hypothesis is rejected. These funds had more exposure to the Reverse Repo which could have been the reason for their containment. RBI regularly reduced the Reverse repo and these funds would have made profit out of that.

7.2 Comparative Analysis of Assets under Management (AUM) Patterns:

3. To do a comparative analysis on the AUM Patterns of the Mutual Funds (Equity) of SBI during a boom period (April 07 Jan 08) and a recession period (Feb 08- March 09). Null Hypothesis: There is no significant difference between the performance of the following funds during the period April 07 Jan 08 and Feb 08- March 09. Hm01- SBI Multicap Fund Hm02- SBI Equity Fund Hm03- SBI Index Fund Hm04- SBI Multiplier Plus

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Hm05- SBI Bluechip Fund Hm06- SBI Tax Gain Fund Hm07- SBI Contra Fund Hm08- SBI Emerging Opportunities Hm09- SBI FMCG Fund Hm010- SBI IT Fund Hm011- SBI Pharma Fund Hm012- SBI Comma Fund Hm013- SBI Global Fund Hm014- SBI Mid Cap Fund Hm015- SBI Arbitrage Fund Hm016- SBI Balanced Fund Alternate Hypothesis: There is a significant difference between the performance of the following funds during the period April 07 Jan 08 and Feb 08- March 09

Hma01- SBI Multicap Fund Hma02- SBI Equity Fund Hma03- SBI Index Fund Hma04- SBI Multiplier Plus Hma05- SBI Bluechip Fund Hma06- SBI Tax Gain Fund Hma07- SBI Contra Fund

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Hma08- SBI Emerging Opportunities Hma09- SBI FMCG Fund Hma10- SBI IT Fund Hma11- SBI Pharma Fund Hma12- SBI Comma Fund Hma13- SBI Global Fund Hma14- SBI Mid Cap Fund Hma15- SBI Arbitrage Fund Hma16- SBI Balanced Fund

Table 3: t test of AUM returns of the Equity Funds. H.no. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Fund Name Multicap Equity Index Multiplier Plus Bluechip Tax Gain Contra Emerging FMCG IT Reference Period 1 April 07 Jan 08 April 07 Jan 08 April 07 Jan 08 April 07 Jan 08 April 07 Jan 08 April 07 Jan 08 April 07 Jan 08 April 07 Jan 08 April 07 Jan 08 April 07 Jan 08 Reference Period 2 Feb 08 March 09 Feb 08 March 09 Feb 08 March 09 Feb 08 March 09 t value 2.567 4.415 1.147 3.252 1.460 3.333 2.644 2.500 1.005 .846 Significanc e Value .033 .002 .285 .012 .183 .010 .03 .037 .344 .422 Supporting Hypothesis Hma01 Hma02 Hm03 Hma04 Hm05 Hma06 Hma07 Hma08 Hm09 Hm10

Feb 08 March 09 Feb 08 March 09 Feb 08 March 09 Feb 08 March 09 Feb 08 March 09 Feb 08 March 09

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11. 12. 13. 14. 15. 16.

Pharma Comma Global Midcap Arbitrage Balanced

April 07 Jan 08 April 07 Jan 08 April 07 Jan 08 April 07 Jan 08 April 07 Jan 08 April 07 Jan 08

Feb 08 March 09 Feb 08 March 09 Feb 08 March 09 Feb 08 March 09 Feb 08 March 09 Feb 08 March 09

.538 2.364 2.116 1.964 5.376 2.632

.605 .046 .067 .085 .001 0.03

Hm11 Hma12 Hm13 Hm14 Hma15 Hma16

Interpretation: Multicap, Equity, Multiplier plus, Tax gain, Contra, Comma, Emerging, Arbitrage and Balanced funds have significance level of less than or equal to .05. So the alternate hypothesis is accepted and the null hypothesis is rejected in this case. Except Arbitrage fund every fund is an equity diversified fund. Stock market performed extremely well during the boom period (April 07 Jan 08). These Funds gave very good returns during the boom period but still the drop in AUM is quite evident in these funds. During the recession period (Feb 08 March 09) these funds witnessed a sharp drop in their AUMs.

One reason could be the investors loosing faith in the equity market and started pulling out their investments. And the investors include the FIIs and the Domestic institutional investors (DII). Second reason could be that instead of the investors pulling out from the funds, it could have happened that the price of the stock would have fallen drastically. So it is not mandatory that the investors would have pulled out their money the price of the stock holdings also could be a reason for the decline. Arbitrage fund has given a consistent return during the boom and the recession period. When the return of Arbitrage Fund was compared to other equity funds, almost every month it had given a positive

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return. Its quite interesting that during the recession period Arbitrage funds AUM had also dropped sharply considering its positive returns in that period.

Index, Bluechip, FMCG, IT, Pharma, Global and Midcap were the funds which had significance level of more than .05. Null hypothesis is accepted and alternate hypothesis is rejected for these funds. Apart from Bluechip and Index fund all these funds has a major exposure to midcap stocks, investors might have thought during the fall of market that its better to be invested with the midcap based funds because market came down to around 16000 points from 21000 points. They might have hoped market can bounce back and if it bounces they can make huge profits because it is seen whenever markets had a rally the midcaps were the major gainers.

Bluechip Fund is a flagship fund of SBI mutual funds. It has given amazing returns during the boom period and could have had the investors confidence. Bluechip and Index fund had a mammoth large cap exposure which would have had the investor confidence because many of them still believes that if market revives then it will be the large cap stocks which will make the difference and their recovery is also very fast compared to midcap and small cap stocks.

4. To do a comparative analysis on the AUM Patterns of the Mutual Funds (Debt) of SBI during a boom period (April 07 Jan 08) and a recession period (Feb 08- March 09). Null Hypothesis:

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There is no significant difference between the performance of the following funds during the period April 07 Jan 08 and Feb 08- March 09.

Hp01- SBI Monthly Income Plus Hpo2- SBI Premiere Liquid Hp03- SBI Childrens Benefit Hp04- SBI Income Plus Savings Hp05- SBI Income Fund Hp06- SBI Gilt Fund Hp07- SBI Floater Plan Hp08- SBI Floating Rate short term Hp09- Floating Rate long term Hp010- SBI NRI Investment Plan Hp011- SBI Income Plus Hp012- SBI Insta Cash Hp013- Insta Cash liquid floater Hp014- SBI Short Horizon (Liquid) Hp015- SBI Short Horizon (Income)

Alternate Hypothesis: There is a significant difference between the performance of the following funds during the period April 07 Jan 08 and Feb 08- March 09. Hpa1- SBI Monthly Income Plus

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Hpa2- SBI Premiere Liquid Hpa3- SBI Childrens Benefit Hpa4- SBI Income Plus Savings Hpa5- SBI Income Fund Hpa6- SBI Gilt Fund Hpa7- SBI Floater Plan Hpa8- SBI Floating Rate short term Hpa9- Floating Rate long term Hpa10- SBI NRI Investment Plan Hpa11- SBI Income Plus Hpa12- SBI Insta Cash Hpa13- Insta Cash liquid floater Hpa14- SBI Short Horizon (Liquid) Hpa15- SBI Short Horizon (Income)

Table 5: t test of AUM returns of the Debt Funds H. No. Fund Name Refere nce Period 1 Monthly April 07 Income Plus Jan 08 Premiere April 07 Liquid Jan 08 Childrens April 07 Benefit Jan 08 Income Plus April Reference Period 2 t value Significance Value .035 .844 .020 .685 Support Levels Hpa1 Hp02 Hpa3 Hp04

1. 2. 3. 4.

Feb 08 2.537 March 09 Feb 08 -.204 March 09 Feb 08 2.896 March 09 Feb 08 -.421

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Savings 5. 6. 7. 8. 9. 10.

07 Jan 08 Income April 07 Jan 08 Gilt April 07 Jan 08 Floater April 07 Jan 08 Floating Rate April 07 Short Term Jan 08 Floating Rate April 07 Long term Jan 08 NRI April 07 Investment Jan 08 Long term Income Plus April 07 Jan 08 Insta Cash April 07 Jan 08 Insta Cash April 07 Liquid Jan 08 Floater Short Horizon

March 09 Feb 08 1.219 March 09 Feb 08 -1.452 March 09 Feb 08 -2.318 March 09 Feb 08 .703 March 09 Feb 08 -1.168 March 09 Feb 08 -.922 March 09 .258 .185 .049 .502 .277 .384 Hp05 Hp06 Hpa7 Hp08 Hp09 Hp10

11. 12. 13.

Feb 08 1.298 March 09 Feb 08 -.685 March 09 Feb 08 .974 March 09

.231 .513 .358

Hp11 Hp12 Hp13

14.

April Feb 08 -.533 07 March 09 Jan 08 April Feb 08 -2.017 07 March 09 Jan 08

.688

Hp14

15.

Liquid Short Horizon Income

.293

Hp15

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Interpretation: Only monthly Income Plus fund has a significance level of less than or equal to .05. where the alternate hypothesis is accepted and null hypothesis is rejected. Monthly Income plus is not among the favored debt fund in SBI. The AUM of this fund has been dropping since April 07 till March 09. The reason could be the Monthly Income Plans of other funds could have done well compared to SBI monthly income plan. The second reason could be investors have low confidence on Monthly income plans.

Rest of all the debt funds have a significance level of more than .05, where the null hypothesis is accepted and alternate hypothesis is rejected. This clearly shows the investors exodus from equity to debt market during the recession period. Investors would have found debt as the safest haven during recession because debt funds promises an assured return and safety of capital. Equity market of the entire world had been hit badly and investors could have found solace in debt funds.

Debt funds of SBI were having more exposure to net current assets which made them to give decent returns to the investors. Non convertible debentures, Commercial papers, Certificate of deposits and Securitized debts were the other avenues where the capital was allocated.

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8. Portfolio Churning:
The churning of portfolio by the Fund Manager is a very important aspect for investors investing in a fund. A diagrammatic representation has been shown below for equity funds and the debt funds during the period of April 07 to March 09. The churning of large cap, mid cap, small cap and current assets is illustrated for the equity funds. The churning of commercial papers, non convertible debentures, reverse repo and others which comprises of securitized debts, certificate of deposits, coupon bonds, short term deposits, and equity shares. The diagrammatic interpretation of the portfolio churning gives us the idea of how the Fund Managers responded during the boom period i.e. during April 07 to Jan 08 and how they tackled the recession period i.e. during Feb 08 to March 09.

8.1 Portfolio Churning of Equity Funds

Large 120 100 Percentage 80 60 40 20 0 7May 7-Jul 7Sep 7Nov 8Jan 8Mar 8May 8-Jul 8Oct 8Dec 9Feb Large

Months

Figure 1: Churning of large cap allocation during a period of April 07 to March 09

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Mid 70 60 50 40 30 20 10 0 7May 7-Jul 7Sep 7Nov 8Jan 8Mar 8May 8-Jul 8Oct 8Dec 9Feb Mid

Figure 2: Churning of Mid cap allocation during a period of April 07 to March 09

Small 20 18 16 14 12 10 8 6 4 2 0 7May 7-Jul 7Sep 7Nov 8Jan 8Mar 8May 8-Jul 8Oct 8Dec 9Feb

Small

Figure 3: Churning of Small cap allocation during a period of April 07 to March 09

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Current Assets 35 30 25 20 15 10 5 0 7- 7-Jul 7May Sep 7Nov 8Jan 8Mar 8- 8-Jul May 8Oct 8Dec 9Feb Current Assets

Figure 4: Churning of Current Assets allocation during a period of April 07 to March 09

8.2 Interpretation of portfolio churning patterns of Equity Funds

The above diagrams represent SBI Bluechip Fund for large cap, SBI Magnum Global Fund for mid cap, SBI Emerging Opportunities Fund for small cap and SBI Multiplier Plus for current assets. Every fund represents similar churning, so among them these particular funds has been chosen. Large Cap Every fund has been churned almost in an identical way as shown in the above diagram of SBI Bluechip Fund. The percentages of large cap exposure were increasing during the boom period i.e. during April 07 to Jan 08. One reason might be that the rally of Sensex from 12000 points to 21000 points was very fast and unpredictable and may be because of that reason the fund managers would have parked their money more in large cap stocks. Large cap stocks were fundamentally strong and would not have a collapse like the mid cap or the small cap stocks. So during the rally of Sensex the fund managers

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increased the large cap percentages and simultaneously decreased the mid cap, small cap and current assets exposure. The large cap stocks gave fantastic returns during the boom period and the Net Asset Value (NAV) of the mutual funds rose swiftly.

As soon as the markets started crashing after Jan 08 the fund managers started reducing the large cap exposure and increased the exposure of mid cap and small cap stocks. Sensex came down from 21000 points to 16000 points which might have enticed the fund managers to increase the mid cap and small cap exposures. The fund managers would have thought if the market climbs then the midcaps and the small caps will have a better rally than the large cap. So during the entire recession period i.e. Feb 08 to March 09 the fund managers were marginally reducing the large cap exposure. The reason might be when the markets starts recovering the mid cap and the small cap stocks can give exorbitant returns in quick time.

Mid Cap The mid cap churning for all the funds were similar to the diagrammatic representation of SBI Magnum Global Fund. The mid cap exposure kept decreasing during the boom period and then it started during the recession period. The interesting fact is that during Sep 08 the mid cap exposures were reduced considerably for each fund. The reason could be the fall of Lehman Brothers and weaker global markets which forced the fund managers to reduce the mid cap exposure and increase the current assets and large cap exposures for time being. But since October 08 the mid cap exposure is increasing again

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and fund managers might have a hope that markets will recover soon and they can book quick profits from the mid cap exposures.

Small Cap SBI Emerging Opportunities Fund represents the churning of the small cap stocks. The diagram clearly gives us an understanding that small cap exposure was reduced considerably during the boom period and then during the recession period it has been increased significantly. The fund managers might be increasing the small cap exposures in order to book quick profits if the market recovers.

Current Assets Current Assets comprises of the reverse repo which is exercised by Reserve Bank of India (RBI). SBI Multiplier Plus shows the diagrammatic representation of the current assets. A holding in current assets was not a favored portfolio for a equity fund manager. During the boom period the exposure was very miniscule in current assets. But as soon as the recession loomed, the exposure in the current assets started increasing significantly. The reason might be the funds were suffering from heavy loss and to contain the loss the fund managers had to increase the current assets exposure. The current assets were the safest haven during the recession period because RBI was continuously reducing the reverse repo in order to increase the borrowing. Current assets were giving decent returns during the recession period which tempted the fund managers to divert their exposure into it. The exposure has increased significantly during the recession period as shown in the diagram.

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Its quite ironic that an equity diversified fund is having around 30% exposure in current assets.

Therefore we can analyze that during the boom period the large cap exposure was increased and then when the markets started tumbling the fund managers increased the mid cap and small cap exposure. In the later half of 2008 when the big companies started falling and GDP growth of countries started plummeting then the fund managers moved towards a safer avenue which is the currents assets.

8.3 Portfolio churning of debt Funds

Commercial Paper 50 40 Percentage 30 20 10 0 7- 7-Jul 77888- 8-Jul 889May Sep Nov Jan Mar May Oct Dec Feb Months Commercial Paper

Figure 5: Churning of Commercial Papers allocation during a period of April 07 to March 09

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Non Convertible debentures 60 50 Percentage 40 30 20 10 0 7Jun 7Sep 7Dec 8Mar Months 8Jun 8Oct 9Jan Non Convertible debentures

Figure 6: Churning of Non Convertible Debentures allocation during a period of April 07 to March 09

Reverse Repo 120 100 Percentage 80 60 40 20 0 7- 7-Jul 77May Sep Nov 8Jan 88- 8-Jul 8Mar May Oct 89Dec Feb Reverse Repo

Months

Figure 7: Churning of Reverse Repo allocation during a period of April 07 to March 09

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Others 100 80 Percentage 60 40 20 0 7May 7-Jul 7Sep 7Nov 8Jan 8Mar 8May 8-Jul 8Oct 8Dec 9Feb Others

Months

Figure 8: Churning of Others allocation during a period of April 07 to March 09

8.4 Interpretation of portfolio churning pattern of Debt Funds

The above diagrams represent SBI Floater Plan for Commercial Papers, SBI Income Fund for Non Convertible Debentures, SBI Income Plus for Reverse Repo and SBI Monthly Income Plans for Others which comprises of Securitized debts, Certificate of Deposits, Equity shares and dated Government securities. Every fund represents similar churning, so among them these particular funds have been chosen.

Commercial Papers Commercial Papers are an unsecured, short term debt instrument issued by corporation typically for meeting the short term liabilities. Commercial papers doesnt have any kind of collaterals, therefore companies with high debt ratings will easily find buyers without offering substantial discounts.

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From the above diagram we can analyze that the fund managers started increasing the commercial papers exposure since August 07. The reason might be an increase in the issuances of commercial papers by the organizations in order to meet their short term obligations. Its quite an interesting observation that during Quarter 2 and Quarter 3 of both years i.e. 2007 and 2008 has witnessed a significance rise in the exposure of commercial papers. The reason could be the top notch organizations issue lots of commercial papers during that particular period. In January 2008 the fund managers hiked the commercial papers exposure to around 40%.

September and October 08 saw a major increase in commercial papers exposure and the reason behind it would be the global turmoil and the fall of some big organizations like Lehman Brothers and AIG. The organizations might have issued lot of commercial papers in order to shrug off their short term liabilities and to retain their stake holders interest. Since November 08 the exposure in commercial papers has reduced considerably. The reason could be the Satyam fiasco which would have dismantled the investors faith on commercial papers since its an unsecured loan.

Non Convertible Debentures Non Convertible Debentures is an unsecured loan to the corporation. Non Convertible Debentures cannot be converted into equity shares of the issuing company. Non convertible debentures usually earn higher interest rates than convertible debentures. Non Convertible debentures had a similar exposure as that of Commercial Papers. The concept of Non convertible debentures is similar to commercial papers. Both are issued

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as an unsecured loan to an organization. The exposure trend adopted by the Fund Managers was also the same for both Non convertible debentures and Commercial papers. Non convertible debentures exposure increased during Quarter 2 and Quarter 3 of 2007 and 2008. The fund managers reduced the non convertible exposure since September 08. The financial meltdown would have been the prime reason for this fall. Satyam fiasco also would be one of the reasons for tightening loans for any organization which would have compelled the fund managers to reduce the exposure in non convertible debentures.

Reverse Repo Reverse repo is a process of purchasing of securities with an agreement to resell them at higher price at a specified future date. Reverse repo also refers to the rate at which Reserve Bank of India (RBI) borrow money from the banks. The Reverse Repo exposure has moved northwards during the recession period. The reason could be the continuous fall in the reverse repo rates by the RBI. The fund managers had more confidence on the reverse repo as it became a very efficient part during recession. Even the equity funds raised their exposure significantly in reverse repo. The continuous fall in the reverse repo rates tempted the debt fund managers to raise the exposure significantly. The most interesting part is since October 2008 SBI Income Plus fund had 100% exposure in reverse repo which shows the positive intent of the fund manager towards it.

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Others Others include the Securitized debts, Certificate of Deposits, dated Government securities and equity shares. These are the risk free instruments in the market. The Others part was having an average exposure during 2007 and 2008. But during 2009 the fund managers increased the exposure. The reason could be the fund managers more faith on risk free instruments rather than the risk oriented instruments like the commercial papers and non convertible debentures. The Satyam fiasco would have added more fuel to high exposure of risk free instruments.

9. Primary Data Analysis

Case 1: Market Informations vs. Investors Confidence on Fund Manager H0 Market Informations does not impact the Investors Confidence on Fund Manager H1 - Market Informations impacts the Investors Confidence on Fund Manager

Case 2: Return on Investment vs. Investors Confidence on Fund Manager H2 Return on Investment does not impact the Investors Confidence on Fund Manager H3 Return on Investment impacts the Investors Confidence on Fund Manager

Case 3: Attitude of an Investor vs. Investors Confidence on Fund Manager H4 Attitude of the Investor does not impact the Investors Confidence on Fund Manager H5 Attitude of the Investor impacts the Investors Confidence on Fund Manager

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Case 4: Market Conditions vs. Investors Confidence on Fund Manager H6 - Market Conditions does not impact the Investors Confidence on Fund Manager H7 - Market Conditions impacts the Investors Confidence on Fund Manager

Case 5: Reference Group vs. Investors Confidence on Fund Manager H8 Reference Group does not impact the Investors Confidence on Fund Manager H9 Reference Group impacts the Investors Confidence on Fund Manager

Table 6: Regression Analysis

Model Summary Adjusted R Model 1 R .635a R Square .403 Square .315 Std. Error of the Estimate .46830

a. Predictors: (Constant), RG, RI, MC, MI, AT

ANOVAb Model 1 Regression Residual Total Sum of Squares 5.030 7.456 12.486 df 5 34 39 Mean Square 1.006 .219 F 4.587 Sig. .003a

a. Predictors: (Constant), RG, RI, MC, MI, AT b. Dependent Variable: DV

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Coefficientsa Standardized Unstandardized Coefficients Model 1 (Constant) MI RI AT MC RG a. Dependent Variable: DV B .027 .514 .150 .114 .186 .034 Std. Error .928 .141 .129 .252 .131 .154 .528 .163 .067 .193 .031 Coefficients Beta t .029 3.637 1.163 .452 1.422 .219 Sig. .977 .001 .253 .654 .164 .828

Interpretation Market Informations impacts the investors confidence on fund managers. Market Information is a composite ranging from firms fundamentals in terms of its performance. The macro economic variables such as Foreign Institutional Investors (FII) inflows, Gross Domestic Product (GDP) growth, inflation and interest rates influence the performance of a firm. An investment decision gets carried away by market information. As far as mutual fund investment is concerned an investor analyses the market information and form a perception about fund manager which is supported in the data analysis. Thus, market information remains a key variable to reflect the fund managers capabilities.

Return on investment, Attitude of the investor, Market conditions and Reference group has no impact on the investors confidence on fund manager. Thus it accepts the null hypothesis and rejects the alternate hypothesis.

10. Investor behavior cycle the influence of performance and information on investor confidence on fund managers
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The crux of this research lies in understanding the factors that influence the investor behavior cycle. With the above collected primary and secondary data a relationship will be established among them which will signify the variation in investors confidence on fund manager.

According to the market conditions the fund manager reacts first. The market conditions will propel the fund manager to churn his fund portfolio. The fund manager can do an aggressive or a conservative churning depending on the market conditions. The fund managers reaction to the market conditions has to be fast in order to seize an available opportunity or by avoiding a disaster. The churning of portfolio is a key skill for a fund manager.

The portfolio churning of the fund manager is in turn information for an investor. An investor keeps track of the market information. Market information also includes the Net Asset Value (NAV) of a fund. The portfolio churning of the fund manager reflects the performance of the fund. Performance of the fund will be information for an investor. The NAV of the fund will be the parameter for its performance. An investor notices the NAV first before investing in a fund. Almost every investor will check the rise and fall in NAV of a fund before investing.

The fund performance will give confidence to the investor for investing in a particular fund. The market information acquired by the investor will determine the investors

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confidence on the fund manager. Market information is one of the key variables for an investor to generate confidence on any fund manager. Good information from an extremely reliable source can lead an investor to go bullish for a fund. The fund managers also are very cautious while churning their portfolio. The fund managers are extremely aware that the performance of their fund will be a source of information for an investor. So the fund managers will be careful because proper churning might lure more investors to invest in that fund and vice versa.

Investors confidence on the fund manager leads to investors behavior. Investors behavior is indirectly reflected in the Assets Under Management (AUM) patterns. If the investors has confidence on a fund manager then they might invest more in the fund which in turn will increase the AUM of the fund. Disappointing market information about a fund may also result in investors loosing confidence on the fund manager. That might lead to pulling out of money by the investors. Though AUM pattern is not completely influenced by investors investments, the present study assumes the changes in AUM to be the result of investors inflow or outflow from the fund. Investors confidence on the fund manager determines whether an investor wants to invest more on that particular fund or not. More confidence propels the investors to invest more on the fund this activity of the investors lures the fund manager to churn the portfolio in order to give more returns to the investors. So it is back to the position from where it started i.e. portfolio churning by the fund managers. Thus the interpretation clearly points out that the portfolio churning by a fund manager according to the market information determines the fund performance. The NAV of the

48

fund is the key parameter while measuring a funds performance. The fund performance will generate investors confidence on fund manager. The investors confidence will lead to the investment behavior of an investor. Inflows and Outflows of money by the investor from a fund depend on the investors confidence on fund manager. More confidence leads to more investment which again re- iterates to portfolio churning by the fund managers to ensure more returns to the investors.

Portfolio Churning by Fund Manager

Investors Behavior (AUM Patterns)

Market Information

Investors Confidence on Fund Manager

Figure 9: Investor Behavior Cycle

11. Summary of Findings

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Debt funds with higher reverse repo and secured loans exposure has performed well. Equity funds have increased the current assets exposure during the recession period. Debt funds AUM has fallen drastically during the boom period. Despite recession AUMs of all debt funds except Short Horizon Liquid fund moved southwards during Feb 08 to July 08. Premiere Liquid, Insta Cash, Insta Cash Liquid and Short Horizon Liquid have never given negative return in NAV during April 07 to March 09. Premiere Liquid and Short Horizon Liquid funds had a sharp increase of 150% and 123% respectively in their AUMs during April 08. Short Horizon scheme Income has recorded the highest growth of 594% during Feb 09. Insta Cash recorded second highest growth of 253% during Nov 08. SBI Gilt fund have recorded a return of 12% in NAV during Dec 08.

All equity funds have given positive returns during April 08, August 08 and Dec 08 despite recession. All equity funds have given positive returns in their AUMs during April 08, August 08 and Dec 08 despite recession. Arbitrage Opportunities is the only fund which has given positive returns during boom and recession. SBI Comma fund has recorded the highest return in NAV of 20% during Oct 07. SBI magnum midcap fund recorded the highest fall in AUM during Oct 08 of 34% approx. SBI Magnum Index fund recorded highest growth in AUM of 36% during April 08.

12. Suggestions

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1. Market Information should be provided to each and every client. The study clearly points out the importance of market information to the investors. Fund fact sheets should be sent to all clients through email. The investment advisors of SBI Mutual Funds should highly emphasize the importance of the market information. The name of the fund manger, investment objective, returns, cost, sector allocation and top 10 holdings should be highlighted by the investment advisors. 2. Investor Education is a very significant factor for an investor and State Bank of India Mutual Funds. SBI MF should conduct investor education programme to educate the investors about various funds. They can make a profile sheet for an investor and can measure their risk appetite and can subsequently suggest funds for the investors. Every weekend SBI MF can conduct the programme with a set of 10 or 20 retail clients. With these programme also SBI MF can impart market information to the retail clients. 3. Transparency is a major issue in todays world. In many cases it happens that the third party or a broking firm which sells mutual funds of different Asset Management Company (AMC) might miss sell a fund to an investor. This can happen because the revenues paid by the AMC to the broking firms are unknown to an investor. Any broking firm can push more equity products to their clients instead of debt funds because equity funds give more revenues to them. Similarly among equity products also New Fund Offers (NFO) might offer higher revenues than existing good funds. So the revenue distribution should be very transparent.

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4. Introduce more Arbitrage funds which can blossom during boom period and can withstand recession period. SBI Arbitrage Opportunity fund is one of the funds which have not given a negative return during the period of April 07 to March 09. Arbitrage funds will provide the hedging opportunities to SBI Mutual Funds.

5. Investors are broadly divided into 3 categories which are aggressive, moderate, and conservative. There can be few set of customers who fall in the grey areas between an aggressive and moderate category or between a moderate and conservative category. SBI should conduct a regular study to learn more about these set of investors and can design funds based on their risk appetite. This initiative can be a unique one and if the funds perform well then SBI can increase their market share in the mutual funds sector.

6. SBI should consider introducing fund based trail fees to its distributors. SBI should provide higher trail fees for the funds which are fundamentally good but underperformed. This move might trigger the distributors to promote those under performing funds of SBI more aggressively and can increase the market share of SBI. The funds which have already performed extremely well should be available with normal available trail fees as they are already known to investors.

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13. Limitations
1. Though the AUM levels can also be argued as a composite of market values, in the present study, AUM levels are taken as a proxy for measuring investor behavior where investment activity (behavior) is construed as a reflection of investor confidence in fund managers. According to the confidence levels,

investors choose to be players in the market by participating in investment activity which is reflected in the AUM levels

2. Data of Net asset Value (NAV), Assets Under Management (AUM) and Portfolio details are not available for August 2008.

14. Scope of Future Research

The present work can be expanded in future with respect to incorporation and analysis of variables such as the role of investor attitude, transparency levels in reporting, impact of governance standards of corporations on market/investor reactions, credibility of rating agencies and the investor perceptions thereof.

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15. References
Books: 1. 2. Mutual Funds, 2007, ICFAI, Hyderabad. Jayadev.M, 1998, Investment Policy and Performance of Mutual Funds, Kaniska Publishers, New Delhi. 3. Jordan, Fischer, 1995, Security Analysis and Portfolio Management, New Delhi.

Journals: 1. 2. Europroperty 2004/2005, Germany Duffy, Maureen Nevin, Dec 2004, Vol 198 issue 6 from When Investors trust is shaken. 3. 4. Reputational Repair by Risk, March 2004, Vol. 4, Issue 3. Mutual Fund flows and Investors returns- an empirical examination of fund investor timing by Friesen, Geoffrey.C, Sapp, Travis R.A. Journal of Banking and Finance, Sep 2007, Vol 31, Issue 9. 5. Investor Profiling and Investment Planning by Purkayastha, Saptarshi, ICFAI Journal of Management Research, Dec 2008, Vol. 7, Issue 12. 6. 7. 3 Funds that every investor should own by Forbes, Sep 2003, Vol. 172, Issue 5. Success in complex decision contexts- The impact of the Consumer knowledge, involvement and risk willingness on Return on Investments in Mutual Funds and Stocks by Martenson, Rita, International Review of Retail, Distribution and

Consumer Research, Oct 2005, Vol 15, Issue 4.

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8.

Manager- Investor conflicts in Mutual Funds a research done by Mahoney, Paul.G, Journal of Economic Perspectives, spring 2004, Vol. 18, issue 2.

Websites: 1. Prowess Online Database. 2. www.sbimf.com 3. www.amfiindia.com 4. www.sebi.gov.in 5. www.nseindia.com 6. www.valueresearchonline.com 7. www.benchmarkfunds.com

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16. Appendix
1. NAV- Net Asset value 2. AUM- Assets under Management 3. FII- Foreign Institutional Investor 4. DII- Domestic Institutional Investor 5. SBI- State Bank of India 6. MF- Mutual Funds 7. NFO- New Fund Offers 8. RBI- Reserve Bank of India 9. FMCG- Fast Moving Consumer Goods 10. IT- Information Technology

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